Nov. 24, 2022

ESG Regulation and Initiatives Outside of the U.S.

The SEC’s interest in environmental, social and governance (ESG) issues as they relate to corporate disclosures and private fund investment strategies is well documented. The CFTC has also expressed interest in climate-related financial risk relevant to the derivatives markets and the underlying commodities markets. U.S. regulators, however, are not alone in their interest in this area; in fact, the regulation of ESG-related issues in the investment management context has been driven by foreign regulators in many ways. For example, the E.U.’s Sustainable Finance Disclosure Regulation, which imposes new disclosure obligations for asset managers, took effect on March 10, 2021. In addition, some of the key ESG-related standards and frameworks for fund managers have been developed in a global context. Therefore, as the U.S. is celebrating Thanksgiving today, this issue of the Hedge Fund Law Report features five articles on ESG regulation and initiatives around the world. These articles present two global ESG standards and discuss the regulation of ESG in the E.U., Hong Kong and Luxembourg. We will resume regular biweekly publication on Thursday, December 8, 2022, and the issue will feature the second article in our series analyzing the comments submitted to the SEC on its proposed private fund reforms. See “Morgan Lewis Attorneys Discuss the Global ESG Landscape” (Aug. 19, 2021).

Global ESG Standards: U.N. Principles for Responsible Investing

In 2006, the United Nations Secretary-General launched the Principles for Responsible Investment (PRI), a set of aspirational standards designed to guide investors toward creating a sustainable global financial system that fosters good governance, transparency, integrity and accountability. Hedge funds are important investment vehicles for many signatories to the PRI initiative. To assist its signatories in their hedge fund investments, PRI issued a white paper, entitled “Responsible Investment in Hedge Funds: A Discussion Paper.” This article provides an overview of PRI’s paper, including its assessment of the advantages and risks of various hedge fund investment techniques and strategies for ESG investors, as well as a roadmap for responsible investment in and by hedge funds. For a look at another ESG framework, see our two-part series on the Net Zero Asset Managers Initiative: “What It Is and What It Requires” (Feb. 3, 2022); and “How to Make the Commitment” (Feb. 10, 2022)

Global ESG Standards: SBAI Responsible Investing Framework

There is a growing expectation among institutional investors that fund managers develop and disclose their approaches to responsible investments (RI), according to the Responsible Investment Policy Framework (Framework) issued by the Standards Board for Alternative Investments (SBAI), an association of alternative investment managers. The Framework discusses the fundamental considerations for developing an approach to RI and the key components of RI policies. The goal is to offer “a non-prescriptive framework for alternative investment managers to develop an approach to RI and to document this approach in an RI policy,” according to SBAI. The first article in a two-part series explains how to use the Framework, identifies five approaches to RI in general and discusses four approaches to incorporating RI principles into investment strategies. The second article analyzes governance, disclosure and measurement, as well as three key considerations for fund managers. For more from SBAI, see our two-part series on avoiding parallel fund conflicts: “New SBAI Standards and Case Study Provide Guidance for Mitigating Conflicts” (Jun. 11, 2020); and “Common Challenges for Hedge Fund and Credit Strategies” (Jun. 18, 2020).

ESG Regulation in the E.U.

On March 10, 2021, new disclosure obligations for asset managers came into force under the E.U.’s Sustainable Finance Disclosure Regulation (SFDR). Although some uncertainties remain as to the precise scope of the new regime, it is generally accepted that U.S. and other non‑E.U. asset managers are subject to the SFDR with respect to any funds that they have registered for marketing under the E.U. Alternative Investment Fund Managers Directive national private placement regime. This guest article by Sidley attorneys Leonard Ng and Matt Feehily explains how the SFDR applies to U.S. asset managers, sets out the key action points for U.S. asset managers that fall within the SFDR’s scope, discusses some common approaches to the disclosures taken to date and highlights remaining areas of uncertainty for U.S. asset managers with non‑ESG funds. Comments about U.S. asset managers apply equally to U.K., Asian and other non‑E.U. managers. For more on the SFDR, see “Navigating the Evolving Legal and Regulatory ESG Investing Terrain (Part Two of Two)” (Dec. 10, 2020).

ESG Regulation in Hong Kong

The Hong Kong Securities and Futures Commission (SFC) issued its Consultation Conclusions on the Management and Disclosure of Climate-related Risks by Fund Managers (Conclusions), requiring fund managers managing collective investment schemes to take climate-related risks into consideration in their investment and risk management processes and make disclosures regarding those investment and risk management policies and processes. The Fund Manager Code of Conduct (FMCC) will be formally amended to incorporate the new requirements. The SFC also issued a circular to licensed corporations to set out expected standards for complying with the FMCC. This guest article by Anne-Marie Godfrey and Ruby Ho, attorneys at Akin Gump, reviews the Conclusions’ new climate-related risk requirements and their application to fund managers based in Hong Kong. For more on developments in Asia, see “The Global Hedge Funds Landscape: Europe, Asia and the Middle East (Part Two of Two)” (Jul. 15, 2021); “Reformed QFII/RQFII Programs Facilitate Investment in China” (Apr. 8, 2021); and “Key Legal and Structural Considerations for Asian Equity Investments” (Sep. 10, 2020).

ESG Regulation in Luxembourg

A seminar presented by the Association of the Luxembourg Fund Industry (ALFI), hosted by ALFI chairwoman Corinne Lamesch, offered a snapshot of the state of the Luxembourg funds industry and addressed key business and regulatory developments that may have an impact on E.U. fund managers. The program featured remarks from H.E. Pierre Gramegna, the Luxembourg Minister of Finance, and panel discussions with representatives from financial services, asset management, legal and accounting firms. This article covers, among other things, the portions of the program that discussed the growth of sustainable finance and the increasing use of environmental, social and governance investment criteria. See “Luxembourg Remains a Significant Point of Entry for Non‑E.U. Managers to Raise Capital in the E.U.” (May 17, 2018).